Negligence — Valuation — 46-year leasehold interest — Whether rental values too high — Whether plaintiffs’ yield rate advice negligent without qualification
In June 1989
the plaintiff property developers sought advice of K, an associate partner in
the defendant firm of surveyors and valuers, in relation to the plaintiffs’
proposal to acquire a leasehold interest with 46 years unexpired in a property
which they wished to develop. K was retained to negotiate with the vendor and
gave preliminary advice valuing the lease at £3,678,122 using a rent at £60 per
sq ft for office space, £45 per sq ft for residential space and £40 for
basement office space. K used a dual rate yield of 7.5% and 4%. K negotiated
the purchase of the lease and the plaintiffs paid £3.6m. The plaintiffs
contended that K was negligent; the yield of 7.5% was too low, and K should
have warned the plaintiffs of the difficulties of choosing the correct rate for
a leasehold interest and that the rental values were too high.
qualify their advice on the 7.5% yield and, had they done so, the plaintiffs
would not have acquired the lease. K overvalued the rents for the main office
areas by just under 10%, the basement by over 30% and the residential area by
nearly 40%. The price advised by K should have been £3m and not £3.6m and the
difference amounts to negligent advice. In relation to the yield, the failure
to give any qualifications to the 7.5% was negligent. A yield of 8.5% was most likely
to have been correct. The plaintiffs had not failed to mitigate in not taking
up an offer of £4.2m for the lease in September 1989, which was before they
knew that the defendants’ valuation was negligent. The plaintiffs were entitled
to 1% over bank rate from the date of payment of the £3.6m to the date of the
judgment.
No cases are
referred to in this report.
This was a
trial of a claim for damages for negligence by the plaintiffs, Merivale Moore
plc and Merivale Moore Construction Ltd, against the defendants, Strutt &
Parker, a firm.
Robert
Arkenhead QC and Mark Cannon (instructed by Russell-Cooke Potter & Chapman)
appeared for the plaintiffs; Julian Matthews (instructed by Barlow Lyde &
Gilbert) represented the defendants.
Giving
judgment, MR GRAEME HAMILTON QC said: This valuers’ negligence action is
concerned with 35 Portland Place and the Mews behind it, 5 Weymouth Mews (the
property). In June 1989 Mr David Klein was an associate partner in the
defendant firm, well known surveyors, valuers and estate agents. The plaintiff
property developers were minded on his introduction to buy a 46-year leasehold
interest in the property and develop it. There is no need to distinguish
between the two plaintiffs.
On June 12
1989 Mr Klein sent to the plaintiffs an appraisal setting out his advice on the
property. He valued, inter alia, the rental income and the yield. The
latter provides the multiplier to calculate the value of the property from the
rental income.
The rent he
valued at £60 per sq ft for office space on the ground and upper floors, £45
for residential space and £40 for the basement office space. He put a value on
the double garage in the Mews, which produced some strange figures in the
computer printouts, but upon which nothing turns.
The yield he took,
correctly as all agree, at a dual rate. He chose 7.5% and 4% which, as a matter
of interest, when put together come to 8.32%. I mention this in order to add
that the complicated mathematics which provide this figure and convert yield to
multiplier is not something which I need to consider.
The 4% is to
provide a sinking fund to cope with the problem that medium term leases are a
wasting asset which end up with a value of nil. It is agreed on all sides that
this figure, 4%, was correct.
I say that Mr
Klein chose 7.5% and 4%, but in fact he did not. He told me that he relied on
Mr Charles Lochrane frics from
the defendant’s investment department to provide him with the figures for
yield. Mr Lochrane reached the figure of 7.5% in consultation with others of
his division. They started with a figure for a freehold property and increased
that to allow for the lesser value of leaseholds. I asked him about it. In the
end it seemed to me to be no more than an exercise in intuition.
The plaintiffs
say that the rents were too high and that 7.5% was too low and, further, that
Mr Klein should have given them some qualification, warning or caveat that
medium term leasehold property is fraught with difficulties, that there were no
comparables from which they could judge the correct percentage and that
therefore this percentage was suspect.
The most
desirable commercial property for development or investment, as for most
purposes, is freehold. Long term leasehold is commonly for terms of 99, 125 or
more years. Short term leaseholds are for 25 years or less. Medium term
leaseholds are between 25 and 50 or 75 years. There is, obviously, a market for
freeholds and long term leaseholds. There is a specialised market in short term
leaseholds, mostly from pension funds who rely upon rental income assured by
good tenants with strong covenants. The medium term leasehold is difficult. The
reason is obvious: it is a wasting asset.
There are
precious few dealings in medium term leaseholds. When the experts who gave
evidence prepared their reports they were unable to find a comparable case.
They needed several to be able to establish what is the correct yield. Mr
Christopher Shores frics, who
gave evidence for the plaintiffs, told me that he knew of no medium term
leasehold property in the West End of London which had been put on the market,
or disposed of, in 1988 or 1989. These years are all important because the
commercial property market in the West End of London, as elsewhere, was strong
then. It started to weaken in mid to late 1989 and in the years that followed
it tumbled. Mr Shores told me, in more general terms, that even when medium
term leaseholds were put on the market they were often withdrawn because no
offer was forthcoming which matched up to the expectations of the vendor. The
market in residential lettings declined somewhat earlier than that in
commercial lettings.
Before
considering the detailed evidence I consider my approach to this case. Mr Klein
admittedly made mistakes. These mistakes concerned the garage and consideration
of what areas to value. These errors may well have amounted to negligence. But
I do not propose to spend time on them. This is because, even if they did
amount to negligence, I do not believe that they did or could have caused the
plaintiffs any loss of substance.
There are two
main issues for me to consider when looking at the plaintiffs’ case and I
propose to concentrate on them:
1. Were the
rental values chosen by Mr Klein too high to the extent that no reasonable
valuer could have adopted them?
2. Did he warn
the plaintiffs of the difficulties of choosing the correct rate for the yield
figures; in other words, in the words of the pleadings, did he qualify the
percentages he chose?
That it was
difficult and risky choosing the appropriate yield for medium leasehold
investment such as this is common ground. Mr Julian Matthews, who appeared for
the defendants, in his closing submission said: ‘Crucially Mr Klein says that
the difficult nature of the leasehold term was a matter to be discussed with Mr
Grievson’. I agree that this is a crucial point. Mr Matthews stressed that Mr
Antony Gutherie frics and Mr
Shores had said that the 7.5% figure was not negligent if suitably qualified. I
certainly so hold. He stressed that Mr Klein was talking to property
developers.
Mr Grievson,
who gave evidence on behalf of the plaintiffs, and with whose evidence I will
deal shortly, confirmed that the plaintiffs knew that medium term leaseholds
might attract a narrower market than long leases or freeholds. I suppose that
anyone who thinks about it would realise that this is so. This does not impinge
on issue no 2 above: should the defendants, as the experts being asked to
advise, have put the plaintiffs on notice that their advice on yields might be
unreliable because of the lack of comparables?
All the
witnesses and expert witnesses who gave evidence impressed as honestly trying
to assist the court with their recollection and with their genuine opinions.
Some witnesses of fact, I am sure, have faulty recollections. Some expert
opinions must be mistaken. But all were trying their best. On the subject of
the experts, I am compelled to say that the intemperate way in which Mr Edward
Lesley frics put some comments in
his supplemental report made me wonder whether he had succeeded in maintaining
the neutrality desirable in an expert witness.
Mr Grievson,
to whom I have just referred, was an impressive witness. He had been with the
plaintiffs’ predecessors between 1973 and 1977 and with the plaintiffs from
1985 to 1990. At the material time he was chief executive. His experience had
been in the residential market. Neither he nor the plaintiffs had in 1989
experience or expertise of commercial development or yields in the West End of
London. I accept this evidence; indeed it is not in dispute.
The plaintiffs
and the defendants had dealt together in the past, but not much involving Mr
Klein. Mr Grievson and the plaintiffs had a high regard for the defendants. The
plaintiffs’ chairman, Mr Dean, had a particularly high regard for them.
Mr Dean had,
in 1989, taken something of a back seat in the day to day running of the
company, but there was a rule that the plaintiffs could not buy property
without his consent. There was another general rule, that if a project could
guarantee 15% profit it could proceed, but not otherwise.
The degree to
which I need to consider the detail of the evidence of Mr Grievson, and others,
is lessened. By the end of the trial there were quite large areas which were no
longer in dispute.
There was
quite a lot of discussion in this case as to precisely what was the defendants’
retainer. In the end this proved to be wasted because there was no real
dispute, and certainly the evidence proved that the defendants’ retainer
included advising on rents, yields and the value of the property as at June
1989.
Para 3.3 of
the reamended defence reads:
Save that it
is admitted that by an oral agreement made between the 6th and 9th June 1989
between Mr Grievson and Mr Klein the Defendant was retained by the First
Plaintiff to negotiate with the vendors of the property and to provide
preliminary advice upon rentals and capital values in respect thereof, in
return for a fee of 1% of the purchase price as negotiated and paid, paragraph
3.3 of the Statement of Claim is not admitted.
The
defendants’ invoice dated July 19 1989, reads:
To:
Identifying the above development opportunity and receiving your instructions
to negotiate for the leasehold interest having remaining term of some 45 years.
To: Advising
as to rental and capital value of the lease of the completed development and
negotiating a purchase price of £3,600,000.
To: Fee as
agreed namely 1% of the purchase price.
It was
expressly conceded by Mr Matthews in closing that Mr Klein’s figures for rent
were acted upon. It was also so conceded that the advice as to the capital
value of the property in June 1998 was likely to be acted upon.
Mr Grievson
told me, and I accept, that he asked Mr Klein how much the property would cost.
In
cross-examination Mr Grievson insisted that the whole purpose of the
defendants’ advice was to make sure that the price of £3.6m was the right price
and that if their figures came out under that price, the plaintiffs would have
not paid £3.6m. The appraisal, to which I have referred above, came up with a
purchase price of £3,678,122. I am told, and I accept, that one of the prime
purposes of this appraisal is to produce this figure. Mr Grievson told me that
the appraisal provided for the profit of 15% and showed that £3.6m was, on the
advice of the defendants, a proper purchase price.
Mr Grievson
talked of the downside and the upside. Taking care of the downside, to him, was
to make sure that the plaintiffs paid the right price for the property. The
upside or what he referred to as ‘what ifs?’ comprised extra profit. The owners
of the property were the Howard de Walden Estate (the estate). The vendors of
the 45-year leasehold term were the Prudential. There had been discussion as to
whether the estate would be prepared to extend or otherwise modify the terms of
the lease. Mr Grievson said that he hoped that the plaintiffs might do something
with the estate.
I accept the
majority of Mr Grievson’s evidence. But his recollection was at fault in one
respect. There is, in my view, no doubt that he, and some others within the
plaintiffs’ organisation, were very much more hopeful that they would get an
extension of the lease from the estate than Mr Grievson now recollects. This is
clear from the correspondence with the plaintiffs’ solicitors and the documents
in the Chesterton papers. I need take only one example. This is Mr Dawson of
Russell-Cooke Potter & Chapman, the plaintiffs’ solicitors, writing to Mr
Barrow of the plaintiffs. It is dated June 29 1989. The letter reads:
I enclose my
preliminary report on the above for your information. I am agreeing the
contract with Prudential’s solicitors and I will let you have this for
signature shortly.
I understand
that you are considering obtaining a longer lease from the Howard de Walden
Estates and also the proposed redevelopment of the building but that your
purchase is not conditional upon either of these. The contract therefore makes
no reference to them. I also understand from Strutt and Parker that you have
had recommendation from Messrs Fletcher Ross Hickling Joseph regarding town
planning and design issues and I hope to have spoken to Keith Blow by the time
you have this report to check on the position. However if there are any
planning or other issues in relation to your proposals that you feel require
further investigations please let me know.
Mr Blow was
the architect with Fletcher Ross Hickling Joseph.
I have no
doubt at all that Mr Grievson, at the time, was very hopeful that the
plaintiffs would be able to negotiate better terms with the estate. There was
never any sensible suggestion that the plaintiffs could acquire the freehold,
but they did hope that they would extend their 45 years into 75 years. In fact,
this would not have very much improved the plaintiffs’ financial situation as
is revealed by a number of documents in the papers. I do not propose to look at
this in detail. In my view, the question of the plaintiffs’ expectations are
irrelevant. It is clear the purchase was not conditional: see above and other
documents. In my judgment, the plaintiffs relied upon Mr Klein’s appraisal
advising them of the rents, the yield and the value of the property as bought.
In these circumstances the fact that they hoped to do better is a red herring.
I propose to
look at one more piece of evidence from Mr Grievson before passing on. In
cross-examination he was asked to look at the Estates Gazette archive
(‘Company file’ February 1988), an article entitled ‘The House that Dean
Built’. Mr Grievson was asked to look at this paragraph on p3:
This rapid
progress was partly thanks to soaring residential property prices in Kensington
and Chelsea. Messrs Dean and Grievson were grateful, but decided that the area
was getting overheated and sought to diversity into a commercial development
and residential property in other areas more quickly.
Mr Grievson
said that this was fair comment. The plaintiffs were looking for quality
developments. He told me that the plaintiffs had bought property for investment
as distinct from development, but that by 1989 the commercial side was seen as
an area where profit could be maintained and the plaintiffs were looking at
this new area, new to them. The property fitted in with the plaintiffs’
strategy. It was a commercial development. Residential development had become
more difficult, but Mr Grievson did not believe that at the time commercial
development had done so. Mr Grievson told me, and I accept, that the plaintiffs
did not have any previous experience of commercial development in the West End
of London. For this reason, they relied upon the advice of the defendants, in
the person of Mr Klein. Their past association with the defendants had been
happy. They, the plaintiffs, did not know what would be the appropriate rent
and the appropriate yield. I am quite satisfied that they were relying upon Mr
Klein to advise on these.
Mr Grievson’s
evidence was that he believed he was entitled to rely on Mr Klein’s appraisal
unless he was told not to. I agree. His evidence was that he told Mr Klein that
he would need his advice in rent and yields. I accept this evidence. I am not
convinced that he told Mr Klein that he would rely upon that advice so given. I
think this is something which he has persuaded himself was said as time passed.
I do not think it makes the slightest difference whether it was said or not.
Mr Grievson’s
evidence was that he had no recollection of any qualification to, inter alia,
the yield and he has no doubt he would have remembered such a qualification. I
accept that this is the overwhelming probability. The plaintiffs were a
respectable, successful, development company and I do not believe that Mr
Grievson would have ignored a warning that the 7.5% carried an enhanced risk.
Had there been such a warning the plaintiffs, I find, would not have bought the
property.
Mr Grievson
told me about Mr Barrow, who really took over from him in this project after it
had been decided to go forward. Mr Barrow was not called as a witness. The
usual comments were made by Mr Matthews, for the plaintiffs, about his absence.
Similarly, Mr Robert Akenhead QC commented on the absence of some possible
witnesses for the defendants. I try this case on the evidence which was called.
In very rare cases adverse conclusions can be drawn from witnesses not being
called. This is not such a case.
Mr Dean, a
solicitor by profession, has been the chairman of the first plaintiff since its
formation, differently constituted in 1961. He confirms that the plaintiffs had
no knowledge or experience of commercial property rents or values in the West
End of London.
On about June
20 1989 Mr Grievson telephoned him when he was on holiday in France. Mr Grievson
put forward the case for buying the lease of the property. Mr Dean was not very
keen. Mr Grievson was very keen. Mr Dean was persuaded to agree to the purchase
of the property. The fact that the defendants had evaluated it and said it was
worth £3.6m played a substantial part in Mr Dean’s agreement. Extracts from Mr
Dean’s witness statement give a sketch of what happened after his agreement:
Contracts were
exchanged on No 35 on 4th July 1989 with completion on 18th July 1989. I was
not directly involved with No 35 until late 1990. I was however kept informed
of what was happening. My understanding was that it took a substantial time to
obtain planning permission which when obtained was for a smaller square footage
than had been anticipated prior to the acquisition of property.
By the early
months of 1990 the property market became more depressed. Residential values
had been wilting since mid-1988 and commercial property values were following
suit. Interest rates remained at a high level, base rate standing at 14% in
July 1989. Due to the state of the market MM became defensive, closing down,
for example, in January 1990 its house building division and running down that
division’s operations. As 1990 progressed the Board became more concerned to
reduce debt and overheads and generally to clamp down on activity and
expenditure. In September 1990 Richard Grievson resigned as a director of MM,
principally because MM was going into reverse and the company could not best
operate with, nor afford, two top people directing the business. The company
was in trouble and I reassumed the role of chief executive which included, of
course, responsibility for No 35.
After Richard
Grievson left MM in September 1990, there were many worrying commercial
problems to tackle in MM, notably high gearing and a deteriorating market.
However, it was not lost on me that No 35 stood the company in at close to £4
million and that interest charges on that money, with base rates at 14% cost
the company almost £600,000 pa simply to retain. Upon Richard Grievson’s
departure I reviewed a number of projects including that relating to No 35 and
it seemed clear to me to spend close to £3 million on the planned refurbishment
of the 45 year lease would have been madness given the market and in any event
impossible since the banks would not provide the money as MM’s gearing was
rising fast. I stopped the architects working on the grand scheme of
refurbishment which had already been out to tender. The first and obvious
solution was to sell the property, but the market was weak and was most likely
purchaser was the freeholder, the Howard de Walden Estate. In October 1990 I
met and spoke to Martin Forester, chief estates surveyor with whom I was
reasonably friendly, on several occasions. He showed no interest in buying the
property. We discussed an exchange of No 35 with several residential properties
on Howard de Walden Estate. Since the value of those properties was so far
below the purchase price of No 35 I rejected wholly that proposal. From the discussions
there was no hope of securing a longer lease which might have made the property
more marketable.
At the same
time as trying to sell No 35 to the freeholder, or exchange it with the
freeholder for something less worrying, eg, a block of flats, I set about
looking into a modest refurbishment in order to get, at any rate, some income
from the property …
Having
decided, however, to carry out a modest refurbishment of No 35 we got on with
the job and completed it fairly briskly and more or less the condition it
stands today; and then we let it — with considerable difficulty.
The
renovation and letting of No 35 was carried out against a background of a
catastrophic financial situation within MM …
At this stage
I have to be careful to distinguish between the redevelopment which was the
plaintiffs’ plan when they purchased the lease and the refurbishment, which in
fact occurred.
Mr Dean was
asked about the letter dated January 16 1992 from Elliott Son & Boyton, the
surveyors and valuers. It discusses, inter alia, the rents the
plaintiffs might expect to recover on the refurbished property. The plaintiffs
are being advised to let the property at £17 per sq ft for the best office
premises. Not surprisingly, Mr Dean had written ‘Christ!!’ in the margin. This
was half the rent that they had earlier been advised they might expect to
achieve on the refurbished property.
On July 10
1992 Mr Dean wrote to the plaintiffs’ solicitors:
I enclose a
copy of an invoice from Messrs Strutt and Parker dated 19th July 1989. You will
read the wording of that invoice.
Chestertons
are about to value 35 Portman Place at £1.5 million, we having spent about
£600,000 on its renovation. You will gather from that that we have suffered
dreadfully on account of its purchase.
The offer to
purchase this property was made by Grievson/Barrow on 20th June 1989 when I was
absent in France on holiday. Exchange was to be within seven days and
completion 14 days thereafter, or some such other swift timescale. Various
computer printouts exist in the company based, one assumes, on Strutt and
Parker’s advice as to the likely rental of £60 per square foot. We are seeking
now to let the space at £20 per square foot!!
Having just
come into possession of this invoice (!) I have not relooked up the files but my
recollection is that those files are fairly bare. Nonetheless, a fee was taken
for advice and that advice, if followed as I assume it was, must have been mad.
What are your
views, please!
I will return
to this letter when I come to consider the delay in bringing these proceedings.
Mr Dean was
asked in cross-examination about the possibility of negotiating better terms
with the estate. He made it clear that he would have been, and was, the point
of contact with the estate. He was not shocked by the estate’s response. He
would have been pessimistic about the estate which had always been difficult.
He said:
We hadn’t had
an inch from them nor had anyone else.
He was asked
to look at the letter at p413 of vol 3 of the bundle. This is from the
plaintiffs’ solicitors to him. The letter says:
at the time
of the purchase I think it was anticipated that the new lease would be obtained
and therefore that the restriction of the old lease was not a problem …
Mr Dean could
not imagine where the writer of the letter got that from. There would have been
no question of a new lease without Mr Dean’s intervention, and there could have
been no confidence in getting a new lease. He said that the estate was
impossible to deal with.
I regard Mr
Dean as an entirely reliable witness who was both trying to and succeeding in
giving an accurate account of what happened. Unlike others from the plaintiffs,
he was under no illusion about getting a better deal from the estate.
Mr Dean told
me that if Mr Grievson, when seeking his go ahead to buy the property, had told
him that the defendants had qualified the yield, he would ask what was meant by
qualified. If it had been explained to him that it meant that the project was
not without risk, he said that he would not have given his approval. I am quite
satisfied that this is so. Had the defendants qualified their advice on the 7%
rate of yield, the plaintiffs would not have bought the property.
Mr Lochrane
was the first witness for the defendants. He was an associate partner and, as I
have said, worked in the investment department. His witness statement showed
that he played a part as a conduit between consultation which he had with his
colleagues and Mr Klein. It was this consultation which produced the 7.5%
figure.
In para 27 of
this witness statement Mr Lochrane says:
It is alleged
that we should have warned about the limited appeal of a medium term leasehold
interest. I believe we would have warned about this but in any event I would
have expected Richard Grievson and Charles Barrow to have known this.
It is perhaps
right at this stage to see just what complaint is made by the plaintiffs in
this connection. The original, unamended statement of claim was served on
November 27 1995 and contains, at para 13(2):
Wrongly
advised, without qualification, that the appropriate dual yield for the
property was 7½% and 4%; the qualification which should have been given was that
there was no established market for medium term leasehold investment property
and accordingly the prediction of the appropriate yield carried an unusually
enhanced risk as compared with the prediction of the appropriate yield in
relation to more conventional properties such as freehold, long leasehold and
very short term leasehold, eg 15 years or less …
This is a very
different complaint to that referred to in para 27 of Mr Lochrane’s first
witness statement.
Mr Lochrane
put in a second witness statement. This was, I have to say, an astonishing
document. It was a combination of expert evidence, which he was not qualified
to give, information from others and argument which should have been presented
by counsel. It was, he told me, drafted with an unqualified colleague of about
his own age (36), who was not involved in this transaction and whose expertise
was principally in agency. I have to say that I got little assistance from it.
Mr Lochrane’s
oral evidence was more helpful. He told me that it was from him that Mr Klein
got his figures for the appropriate yields for the property — that is to say to
be more precise from him and his colleagues in the investment department. They
considered a 46-year term unusual with limited marketability. Their percentage
yields took account of this. The correct figure for freeholds in that area was,
he said, 5.5%.
Cross-examined,
he gave more evidence about yield. He consulted a colleague, Mr Simon Bland,
whose day to day dealings were in brokerage, and Mr Simon Knight from the
agency department, Central London West End.
He agreed that
in 1989 he could not describe himself as an expert in Central London. He had no
direct expertise in rents. He relied on the advice of other people about yield.
He told me that in 1989 the defendants had no medium term leaseholds like the
property for development.
He was aware
that the plaintiffs’ developments had been residential and that they had a
commercial portfolio for investment. He probably was aware that the plaintiffs
had no experience of commercial development in the West End of London.
He expanded
upon the team which produced the 7.5% yield. The main people concerned were Mr
Bland, Mr Harris and Mr Jones, who are all still with the defendants. There
were no notes or calculations or minutes of the deliberations. He was aware
that there were no comparables available for medium term leasehold.
He was shown
para 18 of his first witness statement, which states:
It was
therefore a question of using our professional experience to form an opinion of
the correct value of a leasehold interest by working from the freehold value.
As can be seen from the appraisals prepared at the time we were assessing the
freehold value of a high quality refurbishment and extended property at a yield
of 5½%. The subsequent range of values was made up as follows:
— Freehold —
5½%
— 125–150
year leasehold — 5/10% gearing side by side — 5¾%
— 125 year
lease with 10/15% going bottom slice — 6/6¼%
— 99 year
lease at a peppercorn — 6¼–6½%
— 75 year
lease with 15% gearing bottom slice — 6¾%
— 45 year
lease (the interest being bought) — 7½%.
In the case
of the leasehold interests it was a convention to allow for a sinking fund with
an assumed rate of return at 4% per annum.
He told me
that it was the advice of others which was more relied upon than his advice. He
denied that 7.5% was a complete guess! He said that the thought process was
conventional in the market at the time. It was well accepted that you started
at the nearest point of reference — freehold. He said he did not recall any
comparables for freehold for 99 years although it was likely there were
comparables for 99 years, 125 years and freehold. He says that he did not
recall any comparables for 75-year leases. With no comparables I may, I think,
be excused for using the word intuition.
He said at
first that the computer had no facility for making qualifications. He agreed
that if there was concern over the yield, the rental level or the square
footage reference would be made to this concern in the space where it is noted:
Since gross
area addition is now only 673 square feet is residential requirement overstated
in this appraisal?
Alternatively,
he said qualification would be made by way of covering letter.
Mr Klein was,
of course, an important witness. He was experienced in the letting market,
agency, rent review and valuation. He was very upset by the allegations made
against him. This is clear from the additional statement which he put in during
the trial, dated June 16 1997.
Mr Klein came
to know of the property by January 1989 when Prudential were offering the lease
for in excess of £3.5m. He introduced the property to a development company.
It is useful
to look at this stage at some of the documents in combination with Mr Klein’s
evidence. Mr Klein wrote to the first developers on February 28 1989. He said:
Two deals
have now been reported in newly refurbished buildings north of Oxford Street at
£59 psf on the ground and upper floors averaging £56 psf overall including
basement, in the Howard de Walden project at 39 Queen Anne Street and the
Ladbrook development in Cavendish Place. In this context, our appraisal, at £55
best space is barely keeping pace with the current letting market even if it is
appropriate to discount from Queen Anne Street to
the development period. Few, if any, sites are currently being successfully
bought or funded in the West End without growth assumptions.
It is common
ground that Mr Klein’s appraisal to the plaintiffs was, and ought to have been,
as at the date of the appraisal and without any growth assumptions.
Mr Klein spoke
to Mr Grievson about the property on June 5 1989 and wrote to him on June 6. He
enclosed four plans. The two important for my purpose are P10a and P11a. They
were drawings of a proposed development to the property which had got into
planning difficulties. Mr Klein’s appraisals were on the basis of these plans
as amended by Mr Blow.
In the June 6
letter Mr Klein said about rental values:
Regarding
market lettings in the area, the Chandos Street building in Ladbrook’s
development is rumoured to be pre-let at a rent in excess of £60 psf and the
22/22a Portland Place letting (a Howard de Walden estate direct development) for
over 20,000 sq feet, is reputedly at £58 psf overall to Allied Lyons. Taylor
Woodrow claim to have turned down a number of pre-letting offers well in the
£50s for Manderville Place.
Two previous
recent deals were reported in newly refurbished buildings north of Oxford
Street each at pro rata rents equating to £59 psf on the ground and upper
floors averaging £56 psf overall including basement, in (a) the Howard de
Walden project at 39 Queen Anne Street and (b) the Ladbrook development in
Cavendish Place.
Prudential
advise me they are still discussing the property with two previously interested
parties but there is a strong possibility they will now negotiate with the
estate themselves to obtain a better offer than 75 years (although the basis of
their anticipated negotiating position is, they inform me, only to plead that
75 years has proven unsaleable). In other words, they are putting us on notice
now that any work we carry out on this now could be wasted if they decide to
keep the property.
The Chandos Street
building is generally referred to as 1b Portland Place. 22/22a Portland Place
has been renumbered 24 Portland Place. The development in Cavendish Place is to
nos 12 and 14.
In his oral
evidence Mr Klein said of this extract from the June 6 letter that he did not
look at comparables in great detail because he did not need to. He was dealing
in this market every day. It was vital to keep an eye on the latest
transactions. The market was rising as it had done for two years. Mr Klein had
no concern about the figures he used.
On June 9 1989
there was a meeting and discussion at the property. Mr Blow was there. Mr KIein
told me, there is no dispute about it, that an atrium and lightwells were
discussed. This led to a reduction of the available area for office space.
There was a
good deal of activity on June 12 1989. Mr Blow sent a fax to Mr Klein and to Mr
Grievson. Mr Grievson forwarded his fax to Mr Klein. The covering sheet of Mr
Grievson’s fax reads:
Please call
me as soon as you receive this fax. The proposed areas are a safe solution that
will obtain planning and include, as discussed, a light well to the rear office
space. Please note that half the increase in gross space will have to be
residential.
Mr Blow’s fax
to Mr Grievson says on its facing sheet:
Attached are
the gross and net figures as discussed on Friday. The proposed figures are
based on our drawings 2365/10a and 11a amended notionally to include light
wells to the lower office areas. We have also taken a view on how much extra
space we can add at roof level safely.
P93 of the
bundle sets out figures and at the bottom says:
Proposed
areas allow for an atrium type feature at junction of mews and main building
and a light well through mews. The mansard fourth floor is restricted to the
rear of the main building only.
Later the same
day Mr Klein faxed his appraisals to Mr Grievson. They should have been based
on the ‘safe solution’ referred to in Mr Grievson’s fax.
On June 20
1989 Mr Klein made the offer of £3.6m to Prudential’s selling agents, Goldstein
Leigh Miles.
Mr Klein told
me that he knew that the rent on 1b Portland Place was higher than he had
thought and that he felt that by not increasing the rent on the property it
made him feel more comfortable. I find this evidence a little strange.
Mr Klein
appreciated, as appears from the minutes of a meeting on June 27 1989 that the
floor loading of the property was only 50 lbs per sq ft and that investors were
looking for 80–100 lbs per sq ft.
In
cross-examination Mr Klein confirmed that he had no professional qualification.
He told me
that he was aware that a small percentage shift on the yield could have a
dramatic effect on the price of a property and that it was very important to
get it right. He said that if he was not sure that the yield was appropriate he
would advise the client. I remind myself that he told me in chief ‘for the
yield figure I was acting as a conduit rather than as an originator’.
In February
1989 when writing to his previous, potential client Mr Klein had said:
In this context,
our appraisal, at £55 best space is barely keeping pace with the current
letting market even if it is appropriate to discount from Queen Anne Street to
Portland Place, and does not allow for any market rental growth at all during
the development period. Few, if any, sites are currently being successfully
bought or funded in the West End without growth assumptions.
Mr Klein told
me in evidence that in his appraisal for the plaintiffs he did not make any
growth assumptions.
He was asked
to consider his letter to the plaintiffs of June 6 1989. This was in most
respects virtually identical to his earlier letter, but it left out the passage
I have just quoted. He was asked whether he had made a deliberate decision not
to give this advice to the plaintiffs. He said that he assumed that the
statement was as true in June 1989 as it was in February 1989. By that time he
said property was coming back on the market. He perceived the plaintiffs’
advantage with a possible better leasehold interest. He said it was an unusual
situation and that the client was saying unusual things. I found this bit of
evidence strange too. He had agreed that he had taken the later letter from the
first letter. I do not understand why he should choose to leave out the bit of
advice.
Mr Klein then
told me:
I did not
commit to writing any reservations I had about this property. I didn’t mention
the difficulty of marketing. The Plaintiffs purported to be able to solve the
problems. I certainly mentioned it was a problem but not in writing. The medium
term leasehold was a serious problem. They had an advantage in the market place
which others didn’t. They had not told me they were experts in medium term
leaseholds. I did not know it was only a possibility they could work something
out with the estate because I was told otherwise.
He told me
that his previous client had withdrawn because of the awkwardness of the
leasehold interest. He said that he and the plaintiffs had discussions about
it. He said there were notes or daily entries of any oral advice. He had
serious reservations and they had discussed it on site.
He referred to
his appraisal and told me that these exercises were to see whether the overall
project was sensible. He told me, again, that he acted as a conduit from Mr
Lochrane and would not have been in a position to exercise a separate judgment
as to the appropriate yield.
Mr Klein had
not seen or inspected 1b Portland Place or 24 Portland Place. When he was shown
the figures for 24 Portland Place, he agreed that if he had known that it had
gone at the rate of £52.27 per sq ft overall it would have encouraged him to
put in a lower rent in his appraisal.
Mr Klein gave
a considerable amount of evidence about 1b Portland Place and 24 Portland Place
suggesting that he had done more to familiarise himself with them. At the end
of it I was satisfied that he did not inspect any of the properties and did not
contact the agents of either 1b or 24 Portland Place. I am satisfied that he
was relying upon his general impressions of the terms of leases in that area.
He said that he knew the area extremely well and I have no doubt that he did,
but I do not think that he went into any detail or made the inquiries one might
have expected him to have made. Had he done so, he would have been in a better
position to exercise his expertise on comparables.
Mr Klein was
asked a good many questions about the income that the defendants would expect
to make out of this deal. It is clear that the 1% billed for in July 1989 was
small beer compared with the money to be made by the defendants out of the
letting and sale of the developed property. There is nothing at all sinister in
this.
Mr Klein then
gave this fairly important evidence:
The purpose
of the appraisals was to establish whether the likely value of the end product
had a value in the range of the price we were told we would have to pay to
establish whether it was worth continuing.
He was then
asked the express question:
The
appraisals were provided in order to establish whether the capital value of a
46 year leasehold coincided with the value the Prudential were seeking.
His answer to
that was ‘yes’. That, he said, is what he was saying in his witness statement.
Mr Klein
repeated this in a number of different ways including:
I was
satisfied that £3.6 million represented the value of the interest being
purchased.
He told me
that he would have expected 1b Portland Place to have institutional loading, ie
80–100 lbs per sq ft.
He agreed that
he expected the plaintiffs to rely to a large extent on him for rents and
yields and that he was aware they had no experience in West End commercial
property.
He had seen
plans PO1 and PO2, which are later plans of the proposed development. He did
not suggest they were significantly different from what he had originally
thought would happen. These plans reflected the amendments to P10a and Pl0b
that he had envisaged. That is to say, they broadly represented the property for
which he produced the appraisals.
Mr Klein was
shown the letters at bundle 3, pp229–237 — the expressions of interest in
buying the property. He said:
If by this
stage I had thought that the Plaintiffs had bought a pup I would have
encouraged them to follow these up. I didn’t because I thought they had paid a
fair price and the development was likely to produce a reasonable profit. I
would not criticise the Plaintiffs in 1989 for not disposing of the property.
Mr Klein dealt
with the question of the residential part of the property. He said there was
communication with the main part of the offices. It could be used for
entertaining clients or dining or meeting rooms or as directors’ flats. He said
it was a grey area. He stated that it is a fact of life that the occupiers bend
the rules and use residential space in defiance of planning rules.
Mr Klein was
asked about an offer he had made to Prudential’s purchasing agents. The meat of
it all is to be found in a letter he wrote to them on August 18 1989. It had to
do with a joint letting agency when the property had been developed. He was
criticised because of this passage:
Incidentally,
it is apparent to me (from your letter and our subsequent telephone
conversation) that you have forgotten I made a specific promise to you by which
we intend to stand (despite your memory lapse!) ie, if you are unsuccessful in
securing a joint letting agency from Merivale Moore and if we remain sole
agents without the appointment of any joint letting agent, we will pay to your
firm 10% of our letting fee for 35 Portland Place project when such a fee is
received. You must, however, confirm to us in writing that your clients
Prudential Portfolio Managers are aware of and satisfied with his arrangement,
bearing in mind your instructions from them in respect to sell this property,
and it is a condition of this proposal that you do not (in you efforts to
secure and instruction from Merivale Moore) do anything which adversely affects
the excellent relationship which Strutt and Parker have with our clients.
Mr Akenhead
put it to Mr Klein specifically that it was wholly improper as a purchasing
agent to offer to a vendor’s agent a financial reward of 10% of the letting
fee. Mr Klein simply did not see that there could be anything at all improper
about it. He said:
My integrity
was not compromised. Maybe Mr Cummings was. I thought I was protected by
insisting he told his client.
This offer
was, at the very least, most imprudent. It is a reflection on Mr Klein’s
judgment that he could not even see any room for criticism. I do not think it
takes me very much further in answering the questions with which I have to
deal.
On the primary
facts, I conclude that the defendants’ retainer was to advise the plaintiffs on
the rental values of the property as developed, as to the correct rate for the
yield figures and as to the proper price to be paid to Prudential. That is what
they were asked to do. That is what they did. That is what Mr Klein said he was
trying to do.
I find that Mr
Klein did not qualify his advice on yields in any way. He did not warn that
there was no established market or that his figure for the yields carried an
enhanced risk as compared with figures for freehold, long leasehold and short
term leasehold. He did not warn that the yield chosen was based on opinion and
not on evidence.
I find that
the plaintiffs relied upon Mr Klein’s appraisal both in respect of rental
income and yield. If they had thought that the figure for rental income in the
appraisal did not justify the purchase price, including a 15% profit, they
would not have bought the property. If Mr Klein had qualified his advice on
yields in any way, they would not have bought the property.
I can now move
to consider the expert evidence and reach my conclusions on the two main issues
referred to above.
The plaintiffs
called as experts Mr Antony Guthrie td
bsc frics and Mr Shores.
The defendants called Mr Lesley. Each of the three experts had a somewhat
different range of experience and practice. So far as rental incomes are concerned,
I am quite satisfied that Mr Guthrie and Mr Lesley, whose evidence was directed
to this issue, were both entirely qualified to give such evidence. I will
return in a little more detail about Mr Shores’ evidence later when I am
dealing with yields.
One of the
bones of contention here is to what extent the property can he called ‘prime’.
Everybody agreed that in earlier years property north of Oxford Street was not
prime. As might be expected, the best parts of Mayfair were prime. Mr Lesley
was of the view that because of the high demand and low supply, the area north
of Oxford Street had become prime or very nearly so.
In my
judgment, Mr Shores’ evidence about this was helpful. It was given orally and
he said that the property was a good site. It was not prime. Prime is the very
best. The property was a very good second best. Because of its location, and
the fact that it was listed, it could not comply with the latest requirements.
I accept this evidence. The property was not prime. Property north of Oxford
Street also varies. The property was not in the best location, but was in a
good location.
There was also
a dispute as to what extent the physical drawbacks of the property made it less
desirable. It was, as I have just mentioned, listed and therefore was subject
to certain constraints. It was also long, narrow and terraced. These
disadvantages, said Mr Lesley, were overcome because of the popularity among
many tenants of period buildings. My general conclusion was that while
acknowledging that there was such a popularity, the disadvantages of the
property were such as to detract from its attractiveness to tenants.
It was common
ground that the commercial market in the West End was still active in June
1989. Institutional investment had fallen off somewhat and, as I accept, mostly
foreign investors were still in the market and the foreign investor had a
strong prejudice against leasehold properties.
I mention that
to the south of the property is an embassy which is, at present, very run down
and provides a depressing outlook to all the south-facing windows in the
property. What little photographic evidence there is suggests that this embassy
was run down in June 1989. But I do not think it would be safe to make any
findings as to its state or to conclude that this would have had any impact on
the value of the property.
I had the
advantage of seeing a model which showed the property as it was, and as it was
intended to be, according to the various plans for development. This model was
a most useful introduction to the case and enabled me to follow the evidence
very much more easily. It also gave me help in picturing the effect of an
atrium in the middle of
property. It is convenient to state here my conclusions about these. I find
that the lightwell would have contributed either nothing or virtually nothing
to the amount of light in the building. It would also have reduced the
floorspace. It would also, in my judgment, have made the rooms through which it
passed less attractive. The atrium, on the other hand, would, in my view, have
imported an appreciable amount of light down to and including the ground floor
and some light to the basement. It would also have made an attractive feature.
I mention here
the plans, the first two, SO1 and SO2, show, respectively, the existing floor
plans, elevation and section. P10a is the proposed floor plan in October 1988,
which did not find favour with the planning authorities. P11a is the matching
elevations and section. PO1 is the revised elevation and section. PO2 is the
revised floor plan. They were produced in July 1989 after Mr Klein had advised.
They represent, as Mr Klein told me, what he took to be Mr Blow’s amended
vision of the property.
I was also
taken to view the property and a number of other properties in the area. I
questioned the need for this commenting that I must not second guess the
experts. But the parties wanted it, and I think I did get assistance from it.
To gain
anything from this exercise I had to imagine the property as it would be had
the development contemplated by the architect, Mr Blow, and illustrated in
plans PO1 and PO2 been carried out. I had to do this with a lawyer’s
qualifications and not with those of an architect or a surveyor.
I think it
safest to limit my comments to extracts from notes made the day following the
view. I had the strong impression that, with the possible exception of 39–41
Queen Anne Street, which was a building of a very different character, all the
others shown to me were superior to a marked degree to the property as
developed. In modern slang, they were considerably more up-market. All were
lighter; many were on corner sites; most were in or near sought-after areas;
not one, including Queen Anne Street, was as awkward as the long, thin,
mid-terrace property made up of the main front Grade 2* building facing on to
Portland Place, the mews building at the rear, comprising in part residential
accommodation, and the even thinner building joining them.
A good deal of
evidence was led about planning. There was potential difficulty with planning
consent. But consent was achieved and it was no part of the defendants’
function to advise on planning. I am not going to spend any more time on it. It
is not relevant to my two main issues.
Mr Guthrie and
Mr Lesley agreed that the construction cost of £120 per sq ft indicated that it
would be a good redevelopment. Mr Guthrie thought it would not be a top quality
development because of the shortcomings of the property. His main criticism was
that it was long and thin and had poor light. Mr Lesley accepted that it was
not a perfect property. He said that no period terraced property would be
without similar disadvantages. The two of them disagreed very much about the
amount of light which the property, redeveloped, would enjoy. In my judgment,
the truth lies somewhere in between those two views. As I have said, I do not
think that the lightwell would have been of any sensible use at all. The atrium
would have improved things; but there would still have been a shortage of
natural light.
Mr Lesley
produced, at appendix 1, a list of comparable properties:
24 Portland
Place
61 Queen Anne
Street
73 Grosvenor
Street
1b Portland
Place — entire
1b Portland
Place — lower-ground floor
5/7
Mandeville Place
15 Stratton
Street
30 St James’s
Square
22 Hill
Street
14 Cavendish
Place
12 Cavendish
Place
39/41 Queen
Anne Street.
At the view we
saw in addition to the property:
24 Portland
Place
1b Portland
Place
12 Cavendish
Place
39/41 Queen
Anne Street.
Grosvenor
Street, Stratton Street and Hill Street are in Mayfair and are not, in my
judgment, to be taken as comparables.
I prefer Mr
Guthrie’s views about the rent of the comparables: they indicate a prime rate
markedly less than £60. The view, as I have said, confirmed that this was so.
Mr Guthrie was
of the view that a rent of £60 per sq ft for the best parts of the property
could not have been achieved without forecasting future rental growth.
Everybody agreed that this was not to be done. Mr Guthrie thought that the best
rent would have been £52.50 for the best parts. He then graded the rest of the
property. He divided the ground and upper floors into good offices and deep
offices. He divided the basement into offices and storage. He dealt with
residential separately. He dealt with car parking separately. The latter we can
ignore.
Mr Lesley
valued the ground to top floors at £60 per sq ft. He valued the basement at
between £30 and £42 per sq ft. He valued the residential areas at £45 per sq
ft. Mr Lesley’s resulting £35 per sq ft for the basement was somewhat lower
than Mr Klein’s £40.
It seems to me
that I have to grapple first with whether £60 is a sensible rent as the top
figure. I have concluded that the comparables relied upon by Mr Lesley are
‘better’ than the property. Some are considerably better. My conclusion is that
Mr Klein ought to have valued the best areas at £55. Mr Guthrie gave £52.50 as
his best rent and £55 as the highest rent a reasonably competent surveyor could
have adopted. I prefer to decide what Mr Klein should have done and then
consider whether he has failed in his task. This £55 takes account of the fact
that there is no grand staircase, that quite a lot of the intermediate office
space is modest and that the proposed top floor is mansarded and narrow.
I am
completely persuaded that Mr Guthrie’s evidence about the comparables is more
realistic than Mr Lesley’s. I think that £52.50, however, does not reflect the
property nicely developed. So I take £55.
The property
has a very large basement. Mr Lesley’s own figures provide evidence that the
basements in the comparables attracted 50% of the prime rate. I do not include
the ‘superb’ 1b Portland Place where the ‘basement’ is a lower-ground floor and
is assessed at 69%. I can see an argument that the basement at the property
with its deep, dark spaces might be lower than 50%, but I think, again, that
this would be undermining the value of the whole property as developed. So, in
my view, the basement should be valued at £27.50.
There was a
lot of argument about the residential space. Mr Lesley justified valuing it at
75% of the top price by analogy with residential accommodation on the top floor
of a building connected with the rest of the building by the same lift and
staircase. Mr Lesley recognised that there was some difficulty in this analogy
and asserted that such was the shortage of office space of this nature that a
tenant would take the package as it was presented to him. I do not agree. An
examination of the relevant plans, P10a, P11a, PO1 and PO2 clearly show that
the residential areas are a long way from the main prestigious office space,
that they are reached by a tortuous route and that when you get there the
accommodation is rather mean. I accept Mr Guthrie’s evidence that it should be
valued as residential accommodation and I find that £27.50 is a fair figure.
50% of that prime rent is, if anything, high when held up against the
comparables. If, contrary to planning law, they were to be used as offices,
they would be of limited use.
Mr Guthrie’s
views are somewhat more complex. When looking at the office space he divides it
into good offices and deep offices. He reduces the rent of the deep offices to
£39.38. When looking at the basement he divides it into offices and storage. He
prices the offices at £35 and the storage at £11.11. For residential he puts in
the figure of £20.19.
Mr Lesley’s
approach is markedly different because, in addition to giving his views as to
the value of each part of the development, he prefers to approach the valuation
exercise by looking at the overall rate for the development and allotting
prices for each part of the development at a later stage. In many ways this
approach does not alter the final outcome.
I do not think
Mr Guthrie was right to class any of the space as storage and I think the
prospective tenant would take a broader view about the rest of the property. I
think that Mr Klein was right to divide the development as he did.
So I find that
Mr Klein overvalued the main office areas by just under 10%, the basement by
over 30% and the residential area by nearly 40%. On the areas used in his
appraisal this would reduce the rental value from £994,505 to £857,225. The
value of the leasehold with Mr Klein’s yields in June 1989 would be reduced by
a very substantial amount. If the sensitivity tables put in by the defendants
showing the effect of the change in estimated rental values on the purchase
price can properly be used in this calculation, the price advised by Mr Klein
would have been of the order of £3m. This difference is unacceptable and
amounts, in my judgment, to negligent advice.
Turning to
yields, the evidence was all one way because Mr Lesley conceded that he did not
have the expertise to advise on yields. He says so in his witness statement and
he confirmed it in cross-examination. In his witness statement he refers to
offers made by others for the property. But Mr Matthews expressly conceded that
these offers were not evidence of the market value of the property and could
only be evidence of the level of demand.
So I am left
with Mr Guthrie and Mr Shores. Mr Guthrie’s original view was that 8% and 4%
were correct. He increased this to 8.5%. This increase was caused partly
because he learned that the floor loading was only 50 lbs per sq ft in the old
parts of the building and partly because he had regard to Mr Shores’ views,
whom he respected as a particular expert in this field. Mr Shores is an expert
in short term leases and in medium term leases. He thought the yields should
have been much higher: 9.5%.
Both Mr
Guthrie and Mr Shores conceded that a yield of 7.5%, although too low, would
not have been negligent advice if accompanied by an appropriate warning,
caution or qualification. So Mr Lochrane’s colleague’s intuitive approach did
not result in a negligent figure. But I have absolutely no doubt that it was
wrong.
I need not
examine the details of each approach. There was nothing wrong with starting at
freehold and working outwards to a 46-year leasehold interest. The starting
percentage at 5.5% taken by the defendants’ people may have been a little low,
but it was not negligent. What was negligent, I am persuaded, was not to give
the qualifications.
Mr Guthrie in
his first report says:
I also
consider that unless Mr Klein had either some evidence of leases of this length
being traded or had first hand experience of the demand for these leases, he
should have expressed some words of caution as to the yield he was adopting. In
my opinion the reasonably competent surveyor would be well aware of the unusual
nature of this leasehold interest and the reduced levels of demand that could
be anticipated. He should also have been aware that even if his yield was
correct, it could at extreme be not better than 7½% and consequently that there
was a higher than usual risk associated with this valuation. I would have
expected the reasonably competent surveyor to have communicated these concerns
to his clients. I would consider it wholly incorrect to simply provide a
valuation at a yield selected without any supporting evidence, for an interest
of this nature, without discussing the risks. Because these premises with this
length of lease were unusual, it is difficult to say at what point a competent
prudent valuer would use a particular yield in excess of 7½% without words of
caution. At 8½% the figure I have used which would be more prudent the words of
caution from the prudent valuer would be less stringent.
Mr Shores in
cross-examination agreed strongly with those views and I accept them. Mr Shores
who has, perhaps, a more academic approach than the other experts was basically
of the view that short and medium term leaseholds should only be dealt with by
specialists in those fields. I conclude that this view is too extreme. He said
in his report:
If uncertain
of the precise nature and potential quantum of the risks, such surveyor should
at least have brought the Plaintiff’s attention to such risks …
I agree.
What I find
much more difficult is to decide what the correct yield was. As I have
mentioned above, each expert had a different practice. I think Mr Shores was
adopting a more theoretical approach and Mr Guthrie a more practical approach
to this. Accordingly, I have decided that Mr Guthrie’s revised view of 8.5% is
the most likely to be correct. I was very impressed by Mr Guthrie and I think
he was entitled to reconsider his initial conclusion and, I think, that having
done so he got it right.
Bundle 5, tab
1 is a bundle of reports from Chestertons property consultants. They include a
portfolio valuation as at June 30 1990 which shows the property then valued at
£3.5m. It was considered at an early stage of the trial that this might be
important. Accordingly, bundle 6 produces a file of correspondence from
Chestertons. Mr Guthrie considered the new documents and his telling comment
was:
The valuer
appears to have got his approach fundamentally wrong.
Mr Guthrie
produced a short report and gave evidence, and it became clear to me that,
without a sensible explanation of a number of serious discrepancies in the
figures, I could not place any reliance whatsoever on Chestertons’ valuations.
Accordingly, I do not do so.
The parties
and their advisers are equipped with computers with software which does an
appraisal for them. I have neither the equipment nor the expertise to use it.
Taking the figures at £55, £27, £50 and £27.50, with £5,000 for the car
parking, my calculations bring the site value as at June 1989 to £2,007,544,
say £2m. The advice at £3.6m was plainly negligent.
The
allegations of contributory negligence having been abandoned, I am left with
the question of mitigation of damage. The plaintiffs are required to act
reasonably. I have to decide, as a matter of fact, whether they did so in view
of the following:
1. In
September 1989 they received an unsolicited bid of £4.2m from the underbidder
for the property. All that is known about this is an entry in some minutes.
2. At that
stage the plaintiffs did not know and could not have known that the defendants
had put a negligently high value on the property. In Mr Grievson’s words,
evidence which I accept, ‘we had no reason to believe that the Defendants’
advice was wrong’.
3. They wished
to develop the property and at that stage still planned to do so. They expected
to make a better profit said Mr Grievson, and I believe him. Mr Dean was not
aware of the offer of £4.2m. He said, when asked to consider it, that they had
purchased for £3.6m, believed it was a good project and felt that they would
make a good profit. He doubted if the offer really existed. He estimated that
the plaintiffs would, by September, have spent £l50,000 in interest and between
£50,000 and £100,000 in fees. He said ‘It would have been ridiculous to say get
out of it, forget it. We were working through the normal process’.
4. The
defendants had not suggested otherwise. It is significant that in a series of
letters in August and September 1989 inquiring if the plaintiffs were thinking
of selling, was answered by Mr Klein on September 5 1989 telling the inquirers
that the plaintiffs intended to proceed with the development.
5. Mr Klein
said that he would not criticise the plaintiffs for not continuing.
Mr Grievson
was cross-examined about this offer. He was shown the letter dated October 16
1989 from Mr Waters to English Heritage. Mr Waters was a newly qualified
quantity surveyor working for Mr Barrow. Mr Grievson explained that the letter
had to be seen as trying to make a case to English Heritage. He said ‘there are
always problems with the planners and English Heritage. You crunch your way
through them on a day to day basis.’ He agreed that expectations must have
changed by October 16, but he thought that if the plaintiffs
£4.2m offer up. In my view, he did not regard this offer as necessarily a
serious offer. He was probably right.
I find that it
was reasonable for the plaintiffs not to follow up this bid.
The basis of
calculating damages being agreed, the plaintiffs are entitled to damages of
£1.6m.
In view of the
evidence of Mr Arnold, 1% over bank rate, which is the normal commercial rate
of interest, is appropriate here. In my judgment, the plaintiffs should have
interest at this rate from the date of the payment of £3.6m to today. I am not
persuaded that the defendants, who have had the use of the money, are entitled
to any mitigation of the normal order by reason of the delay in bringing these
proceedings.
I referred
above to a letter written by Mr Dean, who told me that he believed that he
might have been let down by the defendants. He described how between 1992 and
1995 the plaintiffs were in deep trouble. There was a vast property recession.
Gearing was high. The banks were at his throat. The plaintiffs were involved in
a vast legal case against six defendants arising out of the collapse of
Ransome’s Dock in January 1989. Mr Dean felt a deep consciousness of a failure
to deliver as chairman of the company. At the end of 1992 there was a hoax that
the company had gone into liquidation. More pressure came from the bank. People
felt there was no smoke without fire. The share price of the company plummeted.
It had been as high as £5.25. It went down to 8p.
I suppose the
delay may have made things more difficult, but it is very hard to put one’s
finger on any area in which this is so. Certainly, I can find no way in which
the defendants have been prejudiced by the passage of time.
I invite the
parties to consider whether my mathematics are correct. If need be I will hear
further argument on this issue. I have based my calculations on Mr Guthrie’s
document, G2, which was put in with the closing written submissions on behalf
of the plaintiffs.
